Market Insider – Goldman Sachs is predicting a V-shaped bounce back in oil demand but expects the fuel to face a beating from a loss in business travel.
At a virtual media briefing attended by Business Insider Friday, the bank’s head of global commodities research Jeff Curie said: “We believe oil will exhibit a V-shaped recovery but supply will exhibit an L shaped recovery.”
“You are going to lose a big chunk of the jet demand that would have been associated with business travel.”
“Our base case you lose about 2-million barrels per day, you don’t have demand normalized until you get to the third-quarter of of 2022 back to pre-crisis levels,” he said.
Coronavirus has brought air travel to a halt and proven to be tumultuous time for aviation industry, effectively erasing all demand for new aircraft, and therefore, the parts required to make them.
Famed billionaire investor Warren Buffett recently revealed that his Berkshire Hathaway conglomerate sold its stakes in the “big four” airlines in April for a much lower price than it was purchased and branded the investment a mistake.”
Currie added that Goldman Sachs is forecasting oil demand next year to hit 99 million barrels per day in 2021 while demand this year will be 94 million barrels per day.
Global oil demand is expected to fall by a record 9.3 million barrels per day year-on-year in 2020, according to the latest oil market report by the International Energy Agency.
Why oil supply will be L-shaped in recovery
Currie said oil supply will have an L-shaped recovery for three main reasons.
- Shutting in oil wells does damage and it may be difficult to get them back online.
- A sharp decline in capital expenditure.
- Access to capital. A combination of poor returns means people are unlikely to line up capital to work in this space, Currie said.
“Now investors do not want to hear anything about oil. They have been beaten up they are done with this space, it is going to take a lot for them to come back,” Currie said.
What the US can learn from China’s recovery
Goldman’s Currie expects the US to recover in a similar way that China has.
“So far, we look at the rest of the world, it followed China almost perfectly on the way down and thus far is looking pretty much like China on the recovery.
But Currie said floating storage units will need to be emptied before prices can rise back to about $50 a barrel.
“Oil demand in china at its peak was down 25%, it is now down about 5%.”
Oil prices have faced a rollercoaster journey over the last month due to lower demand for fuel during the ongoing pandemic and lack of storage space to accommodate the surplus.
The price of US oil turned negative for the first time in history three weeks ago. Prices have recovered since but still remain volatile as it remains uncertain whether the front-month contract will also turn negative.
The price of oil has continued to slide even after OPEC and its allies agreed to the biggest-ever production cut – one intended to backstop prices. Investors remain unconvinced that the cuts can offset cratering demand for the commodity as the novel coronavirus pandemic keeps society from operating normally.
The price of US oil is trading around 2% lower $29.30 per barrel as of 6:33 a.m. ET, meanwhile Brent, the international benchmark, is also trading 2% lower at $30.24.
The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm